India: Commissioner appeals vs DRP route – A litigation dilemma

published on 17 March 2025 | reading time approx. 4 minutes

India’s tax litigation history is deeply intertwined with the evolution of its taxation system, reflecting the nation's legal, economic, and administrative complexities. Over the years, India’s tax litigation landscape has grown both in terms of accumulating disputes and increasing complexity, driven by evolving tax laws, varying legal interpretations, expanding economic activities, and challenges in balancing revenue collection with taxpayer rights.

Introduction of DRP

In 2009, the Government of India (GoI) acknowledged that the existing dispute resolution process was arduous and time-consuming, leading to a bottleneck in economic growth due to funds being trapped until the successful resolution of disputes. To fast-track the disposal of disputes, the Dispute Resolution Panel (DRP) was introduced via the Finance Act of 2009 as part of the Alternative Dispute Resolution (ADR) mechanism for resolving disputes related to transfer pricing (TP) issues and for foreign companies.

In essence, the DRP was established as an alternative appellate authority to the Commissioner of Income Tax (Appeals) [CIT(A)] to ensure a more expedited resolution of disputes.

Appellate framework for taxpayers

Major administrative differences – DRP vs CIT(A)

Criteria	DRP	CIT (A)
Eligible assessee	Foreign Co. or Assessee having TP Adjustmenty	Any assessee
Constitution of members	A Panel of 3 Commissioners of Income Tax	Single person bench
Appeal process	File Objections with the DRP within 30 days of receipt of Draft Assessment Order	Appeal within 30 days of the receipt of Final Assessment Order
Time limit to dispose the appeal	9 months	Suggestive timeline of 12 months, with flexibility for extension
Binding nature of the decision	Directions given are binding on the department and cannot be appealed by them at Higher levels	Directions given are not binding on the department
Payment of tax demand	Tax demand is not required to be paid until matter is pending before the DRP	Minimum of 20 per cent of the tax demand may be required to be paid before appealing to CIT(A)

Key factors for choosing the appropriate appeal route

Before determining the most suitable appeal route, taxpayers must analyze several critical factors. However, each case must be assessed based on its specific facts and merits. The following considerations are crucial:

Eligibility check: The DRP route is available only to foreign companies and taxpayers subject to transfer pricing adjustments;
Payment of disputed tax demand: he financial burden of disputed tax demands should be carefully evaluated. If the disputed tax demand is substantial, opting for the DRP route can help keep the demand in abeyance until further appeal is filed before the Income Tax Appellate Tribunal (ITAT);
Time-bound proceedings: he DRP is required to complete proceedings and issue directions within nine months, whereas CIT(A) has a recommended timeline of 12 months, which may be extended further if necessary. Taxpayers must analyze the litigation burden and associated costs (tax demand, appeal fees, legal fees, etc.) over the appeal period to make an informed decision;
Likelihood of favorable outcome: Experience within the taxpayers fraternity and industry suggests that DRP directions often lean in favor of the department. This tendency is further reinforced by the fact that the Income Tax Department cannot appeal DRP directions, whereas the taxpayer retains the right to appeal before the ITAT.
Recurring issues: The decision on the appropriate appellate authority is also influenced by whether the disputed issue recurs every assessment year or pertains to a one-time adjustment raised by the department.
Overall timeline consideration: While the DRP provides a fast-track route to the ITAT, its perceived bias towards the department may lead taxpayers to prefer CIT(A), which, despite longer timelines, offers a more balanced opportunity for taxpayers to present their case.

Conclusion

While the tax litigation process is complex and nuanced, however, taxpayers have sufficient reasons to carefully select the most suitable appeal avenue based on the facts and merits of their case. Considerations such as judicial precedents, disposal timelines, litigation costs, and likelihood of success should guide this decision. Ultimately, strategic selection of the appellate route can significantly impact the efficiency and outcome of the litigation process.